Select Committee on European Union Minutes of Evidence

Examination of Witnesses (Questions 100-120)



Lord Taverne

  100. Coming on to the modalities, there is a widespread feeling which I suspect you share that the proposed system is too cumbersome, will make the situation worse and will add to the fears which Roger Bootle earlier expressed. It would be much better if one had some sort of advisory body which reflected national inputs but had an executive council which took the decisions. However, while this might be much more efficient, is it not likely that the kind of people who would constitute that executive body, the bankers, would be precisely the people who inherit the spirit of the Bundesbank, who think in terms of low inflation targets rather than slightly higher inflation targets and who might be a little too cautious and too slow to act when action is needed? How can one ensure that there is an input into an executive body which counteracts what one suspects are the slightly too strong, anti-inflationary tendencies of the executive?

  (Professor Giavazzi) We are coming to the core of the problem. There is a significant amount of discretion in the way the ECB operates. The people who sit on central bank boards are crucial for the way the discretion is utilised. There are two aspects of the problem, that are both important. One is the operating procedures. How do they decide? How do they vote? Who votes? The second is how are they appointed and who appoints them? On the appointment procedure, the political process is very much lacking. We will know tomorrow if the current governor of the Bank of France will be suited to become the next president. Assume he is not. What is the procedure whereby a new president is chosen? Mr Chirac will go to the meeting of heads of state and will say, "Here is my alternative candidate" without any scrutiny. It is very difficult at that point to say, "Who is the alternative? Among whom are you choosing this person?" We have recently had the replacement of a member of the board, the Finnish lady whose name I have forgotten, with the deputy governor of the Bank of Austria. Again, there has not been an alternative. What was the process whereby the deputy governor of the Bank of Austria was chosen? Most likely she is the best candidate for the post, but I do not think there has been an open scrutiny. Because individuals are so important, the way they are selected is very important and here the political process falls down. It is not the fault of the bank. It is the fault of the way that the Council of heads of state, which is responsible for the appointments, comes to a decision. They should have a nomination list of three or four people for each post and a discussion. On the second part, I think the bank has made an enormous step forward with the recent appointment of the new vice-president, Lucas Papademos, who is a wonderful economist in my view. The presence of Papademos on the board has visibly changed the way the board operates in the few months he has been there.

Lord Marlesford

  101. The logic of what the Professor is saying is that nationality and the right of a particular country to nominate should play no part in the thing. How do we get away from that?

  (Professor Giavazzi) Procedures are important. The new appointments on the executive board that sits in Frankfurt should come at the end of a procedure with a nominating committee. The heads of state could appoint a committee and individual countries could come up with suggested names, but then have a procedure where the names are discussed, one against the other. You cannot get rid of nationality in Europe. But we do not want the situation where the new president is hand picked by Mr Chirac, simply because there is no procedure.

Lord Lea of Crondall

  102. Given the many public appointments these days, you could wind up with a position where the head of NATO, the head of the European Commission, the head of the United Nations and everything was French. On the other hand, we could on the criterion or pure merit wind up in the position that all four top jobs were French. Would our two witnesses not agree that instead of just being pious about this problem of transparency of candidates and criteria of selection it is quite difficult to write down a note as to how far one can take account of gender, ethnic minorities, regional balance and so on, because it is not the position, whether Chirac nominates or not, that you can wind up with all the four excellent candidates that get all the four jobs being French. I think it is a bit of a challenge, not just to leave it—would you agree?—saying that there ought to be transparent criteria but saying, "What are these transparent criteria?"

  (Professor Giavazzi) The fact that it is not easy does not mean we should not try. Let me give you an example of what I consider a disaster, which was the procedure whereby we selected a new managing director for the IMF two or three years back. If you remember, the job had traditionally been European. It had always been French. The Germans said it ought to change; it ought to be German. Germany came up with a candidate. Everybody else said no. We ended up with the second best candidate who had to be German and, in my view, this candidate was inferior to the previous one. Now we are stuck with someone who, in the general view, is not the best person to run the IMF. The post will expire in a year and a half and there is no procedure, so once again we will end up with a new managing director of the IMF chosen non-transparently. It is difficult to set down rules for this committee but even the fact of having a committee where people openly compare candidates is an enormous step ahead.

Lord Armstrong of Ilminster

  103. So long as heads of state and government retain the final decision on the appointment of the president—and I do not think they are going to let that go—we shall inevitably have the process of political horse trading with heads of state of government where one person says, "I want this job for a Frenchman and if you give me that I will give you this other job for an Englishman." I fear that we are not yet ready in terms of political human nature for the more ideal system which you propose. I wonder if you would like to comment?

  (Mr Bootle) I was going to return to Lord Lea's hypothetical situation whereby, the jobs being decided on merit, the top four all went to Frenchmen. I should have thought that was almost impossible. There is a difference between a situation where the whole system was constructed in order to allow national representatives at every stage voting in every way on the one hand and on the other a system of checks against complete national domination. We ought to have a system whereby if the best candidates for the top two jobs were French those two candidates got the jobs. It might be acceptable even if the top three went that way but the top four probably is not acceptable. We have to build in some way, formal or informal, of stopping that. That does not necessarily mean that the way you do that is by having every country, however large, with a vote, albeit in the ridiculously complicated procedures being evolved under the voting modalities.

Lord Geddes

  104. We seem to be cantering slightly round the course but not approaching the winning post. I have two linked questions. The size of the executive board. Professor, you spoke about that just now but then very skilfully skirted away from it. Are you satisfied with its present size in itself and are you satisfied with its present size relative to the governing council? Coming back most recently to Lord Armstrong's question, I agree with Lord Armstrong. What roles do you see respectively, in the context of the appointment of the president and members of the executive board, for the Commission, the European Council, the European Parliament and national parliaments?

  (Professor Giavazzi) The body which makes monetary policy decisions should be relatively small. We should have outside presence as well. My ideal composition would be the six members of the executive board plus five outsiders with the President for casting a decisive vote. The five outsiders should again be chosen not among central bankers, like the non-Bank of England members of the Monetary Policy Committee. These 11 people should make monthly policy decisions. National central bank governors play an important role in bringing to the decision table information about local conditions. They should participate in the meetings. They should explain what the economic conditions are in Portugal as opposed to Finland or Ireland, but they should not cast a vote. The vote should be cast by the 11, in my view. We come to the selection procedures. I think the appointment should stay with the heads of state. Currently, the heads of state decide on a proposal by the finance minister, by ECOFIN, and there should be open hearings in the European Parliament and probably in the Economic Committee of the European Parliament.

  105. Those European Parliament hearings therefore, in your opinion, would not be binding?
  (Professor Giavazzi) In this country they are not binding. The select committee could not turn down a member of the MPC appointed by the government. I would go as far as giving the committee of the European Parliament, like in the USA, the possibility of voting against a proposed member. Going back to Lord Armstrong's suggestion, I agree that it is difficult, but if you look at what is happening in the European Commission the top administrative jobs, notably recently the appointment of the director general for economic and financial affairs, Mr Regling, happened through a process of committee. The Commission, in the case of Mr Regling, had appointed a committee which included both insiders from the Commission and outside experts. These people went through a list of potential candidates and came back to the Commission with a list of three candidates who were deemed suitable for the job. You may tell me that Mr Regling had to be German but at least the process through which we got this particular German candidate was far ahead of what we are seeing in the ECB.
  (Mr Bootle) On the subject of the size of the executive board, I would have thought that from an objective standpoint there were no strong grounds for thinking that the board would perform better if it were larger. It is already one member larger than the Bank of England, for instance, and I do not see what is to be gained by having it larger. The argument for having it larger only exists in the context of the voting arrangements for the whole governing council and that goes to the questions we debated earlier on. It may well be that, given the proposals as they are, the strengthening of the executive would be desirable but that also leads to an even larger body which cannot make for efficient decisions. In an ideal world, I would have thought six or maybe even a lower number would be fine but in the context of a different system of voting. I very much agree with the suggestion of the Professor that there should be external members. There is nothing magic about 11 but it is certainly not very different from the situation we have in the UK. With regard to the question of appointments and scrutiny, can I comment on the business of candidates appearing before the European Parliament for approval or the opposite? I do not think the UK experience in this regard is a particularly happy one in that the MPC prospective members are interviewed and questioned by a parliamentary committee but the parliamentary committee does not have the capacity to overturn the appointments. The result of that has been some considerable embarrassment and undermining of the authority of prospective MPS members to achieve not a great deal. I am tempted to suggest that if there is that system there has to be some teeth and the power to overturn an appointment.


  106. In other words, with teeth would come responsibility?

  (Mr Bootle) Yes.

  107. At the moment they are the worst of both worlds?
  (Mr Bootle) Exactly.

Lord Armstrong of Ilminster

  108. Some of those who have given evidence to us on this, while favouring in principle a much more European method of selection for members of the governing council, nonetheless think that in the present state of things we have to have regard to the need for some form of national representation on the governing council. If one accepts that and therefore one accepts the decision made for the voting modalities after enlargement, do you think it would be helpful to add to the system some kind of advisory body like the Monetary Policy Committee which would come out each month, if you like, with a public report as to what they consider is the right course of action to take on the interest rate, while the formal decision would have to remain to be dealt with according to the decision that has just been taken? In other words, you would get the expert opinion which the Monetary Policy Committee would provide and any departure from that by the executive board on the governing council would have to be justified.

  (Mr Bootle) There are some attractions to that idea but, because of the technical qualifications of the independent committee, one would expect that that would make members voting on interest rate decisions on the governing council circumspect and narrow and national considerations whose individual considerations over and above the pursuit of the target as specified in the eurozone as a whole would determine interest rate decisions. However, it seems to me that this would carry some very serious dangers, undermining the authority of the ECB governing council. There would be occasions presumably when the advice was not followed and again greatly complicating the whole process of decision making and lessening the authority of the bodies in question. I said earlier on that I thought there was a serious danger that when you over-complicate or confuse you make monetary policy less effective. This was going to be a serious problem potentially when we came to face deflation. Imagine the position we could have if this advisory committee came out with a completely different set of advice from the decisions taken by the ECB. I think that would be quite disturbing for the public and I do not think it would go in the direction of strong policy.

Lord Taverne

  109. My question is one to which I expect the answer yes but, since we go on what the witnesses say and not what the Committee Members say, I want to put it to you, following up your joint view that Parliament could have which would be like the American advice and consent procedure. If one faces the disadvantages which exist, the need to balance national interests and the kind of IMF situation the Professor mentioned before, is it not much less likely that you would get a Horst Goehler position if they had to submit it to Parliament and knew that Parliament could be bloody minded and reject the candidate? Is this not likely to be a discipline which would tend to improve the prospects of a committee type solution, with good candidates being put forward, people who would stand up to criticism by the Parliament and could not just be somebody put forward by one of the people at the European Council simply because this would solve the domestic, political problem?

  (Professor Giavazzi) I fully agree. If you have to go through a vote of a parliamentary committee, they are going to put up candidates above any doubt whose qualifications are excellent and half-way candidates would not be put up.


  110. What do you feel about the recent decision of the European Council to amend the voting system of the governing council?

  (Professor Giavazzi) I agree that it is a bad process because it brings us to a voting group that moves up to 21 individuals with a rotation mechanism. It has not yet been specified how frequently it will rotate. It depends for how long some countries will go without a vote. The whole idea of 21 people making a decision with this very strong national bias goes against good practice in monetary policy. I think one should put limited blame on the ECB. What they were allowed to do under Article 5 of the Nice Treaty was extremely limited, changing a line of the statute of the bank. The ECB council is right when they say, given what they were allowed to do, this was the maximum they could do. One could reply that they could have said, "We will not do anything because the remit is not wide enough" but they could not do much given the Treaty. It is a political problem and it is not entirely the ECB's fault. I still believe there is some confusion on this but my understanding is that the proposal by the ECB has not been fully accepted yet. There is a negative vote by the Economic Committee of the European Parliament. There is a very sceptical opinion expressed by the Commission and I think the issue is still wide open.

  111. Despite the fact that the Council has agreed with it?
  (Professor Giavazzi) The Council agreed but it also said this should also be considered by the Convention along with proposals for the composition of the Commission, which leaves open the possibility that in the IGC the issue could be opened again. That is the interpretation of many people around Europe.
  (Mr Bootle) I agree with what the Professor has said. The aspect that particularly concerns me is the whole business of rotation. I am concerned about the interpretation of policy, the way it is understood and the ability of policy to influence public opinion, to give conviction and to bring confidence. You are not going to have a completely consistent set of thinking or voting when you have a system of rotation. There could be some awkward situations whereby decisions were undone, directions changed, because of a change in the composition of the voting group. That I do not think inspires confidence by the general public. It tends to consolidate the impression of decisions being made according to arcane rules. Decisions could emerge in which one could have not very much faith. One could not necessarily trace through a series of events and arguments and link them clearly with the decision in the way that you can with the MPC. You can see a history evolving in the way people's thinking has gone and the element of rotation undermines that.

  112. What do you feel about the idea that the ECB should publish minutes of the meetings of the governing council?
  (Professor Giavazzi) I think minutes would be important but one should however realise that if you read the minutes of the Federal Open Market Committee of the Fed you will not learn very much because you can always write minutes in a way that shows everybody is happy.

  113. Lord Armstrong has a great deal of experience in that.
  (Professor Giavazzi) The teeth come in the actual vote. Knowing the votes would be important because we would know that they vote. Nobody has said how they vote. In the current system without an independent committee, I would be worried about publishing individual votes. I would not want the papers the next day to say, "Spain voted in favour and Italy voted against." With an independent committee, I think votes should be published.
  (Mr Bootle) I strongly believe that there should be published minutes with records of votes. The main reason is to properly engage a discussion between the ECB and commentators and experts outside the ECB. In this country I think policy has been greatly improved by this. We understand much better the way the MPC is thinking and, dare I say it, I think also the MPC's thought processes are improved by having this sort of interchange. It is extremely healthy. What emerges out of that is a much stronger decision making process in which people can have much more faith and confidence. I realise there are difficulties because of the national tradition again, but they have to be overcome and the way to overcome them is to say somehow or other the national representation principle has to be jumped.

  114. You get over that by saying they do not represent the nation. Therefore, they do not say, "Spain voted X and Italy voted Y"?
  (Mr Bootle) Exactly.

  115. That would be your ideal situation?
  (Mr Bootle) Yes.

Lord Armstrong of Ilminster

  116. You would have the votes attributed, would you?

  (Mr Bootle) I would, yes.


  117. It might be an acceptable half-way house, given the problems that we still have about nationality, to publish the minutes but without attributing votes. Aggregates perhaps but not the names.

  (Mr Bootle) That would be some sort of progress but it all depends on the way the minutes are written. The important thing is I do not think there should be any shyness about controversy. These are difficult issues and there should not be any worry about revealing that some members were extremely worried about deflation and others were not. We should see what the arguments and what the reasons are for decisions.

Lord Lea of Crondall

  118. I have to put the reaction that both of our friends are wanting their cake and eating it at the same time. Do we not have a trade-off situation here? It is not just a question of being able to hit them all. Lord Marlesford asked you a question on the hypothesis that we would get away from nationality. That is one way of looking at it but if you want ownership—I think you were both hinting: let's be adult and show that we have an ownership of this through transparency—it is more responsible for the Spanish person to have to be seen to be doing what he is doing, albeit he is Spanish or because he is Spanish, either way; but as maximum transparency, as roughly as the Monetary Policy Committee of the Bank of England, because you do not get the sort of embarrassment that would be implied by the Spanish voting this way and the Germans voting that way. Unfortunately, is there not a trade-off between the sort of ownership of the national responsibility you get through that sort of transparency and the downside which is that it is clearly very difficult? The Professor said he would not want the names of the countries to be mentioned. Within the present system where there are national nominations, you do have that dilemma and it can only go one way or the other on a trade-off, but you just cannot have everything.

  (Professor Giavazzi) The current situation should be to help the bank improve. In the case of inflation forecasting and projection, they should be convinced to move in the direction of an inflation report. Minutes would be helpful. We may not learn very much but the minutes would be a move in the right direction. Having the outcome of the vote without the individuals singled out—

  119. Why?
  (Professor Giavazzi) Because we would know. It makes a big difference, if the last decision was taken with 10 against 8, or 17 against 1 or 18 in unison: if we know the vote, we know what they think around the table. I would have a different view about the ECB if I knew that the last decision was a marginal one. In the current set-up where you still have the central bank governors, I would be worried about publishing individual votes because of the press reaction the next day. This allows you go to all the way up to step minus one, which is to have the votes. We would learn a lot. For example, think about the decision ten days from now. The market would have a lot of information, knowing whether the last decision was marginal or unanimous.

Lord Armstrong of Ilminster

  120. The trouble is, in my experience, if you record the numbers of votes each way anonymously, the speculation the next day is such that within 24 hours or possibly six hours everybody knows who voted which way. I do not know that anonymity is going to be sufficient to provide the kind of protection that we think we need. I do not know if you have any thoughts about that. There are ways in which minutes can record the arguments to and fro on one side without attributing them to any particular person. Secondly, I should be unhappy if the process of counting heads and saying "this is the consensus" may sometimes be a very useful way of resolving the problem. Would you not regret if every time a decision was made it had to be on the basis of 10 to 8, 12 to 16 or whatever, rather than by some kind of consensus?

  (Professor Giavazzi) It is not the experience of this country. In the years since you have had the Monetary Policy Committee, at the beginning there was a lot of concern about dissenting votes, but now markets, the press and the public have come to understand even the last decision, which was quite amazing, where all the outside members of the MPC voted one way and the "internal" members in a different way—I did not feel that the reaction was one of big surprise. People have learned to live with the system and accept that there are different views.

  Chairman: I would like to thank you both for a very stimulating hour. Thank you very much indeed.

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